The concept of Business Acumen has many layers and application. In its most foundational form it is a 
skill set that provides business professionals with the ability to understand:
- How any business makes money
- How your business makes money
- How your customers make money
Within this definition, there are sub-levels of comprehension including how a company generates revenues, the cost structures and expenses that are required to generate the revenues, and the difference between the revenues and expenses which are the profits.
One of the biggest challenges facing business organizations today is the proliferation of the product portfolio. In other words, there are too many businesses today who have developed dozens, hundreds, and even thousands of products in their portfolio. Vast, unorganized product portfolios are hard and expensive to manage. The temptation for most thriving businesses is to grow your business by adding more and more products and in theory, more and more customers. Unfortunately, that temptation leads to confusion in the marketing and sales process, the manufacturing process, the delivery process, and most importantly in the eyes of the customers. This confusion in turn results in mismanaged inventories, unhappy customers, and unhappy employees.
80-20 rule of Product Portfolio Management
I was recently customizing one of our Business Acumen Simulations for a client interested in developing the organization’s Business Acumen skills for the leaders of the company. As I poured through some of the product data the client shared, I quickly noticed “it” again; the good old 80-20 rule of chaotic product management. The 80-20 rule of chaotic product portfolio management suggests that 80% of the contribution margin (profit) is driven from 20% of the products. Basically 80% of the products produce very little (20%) of the profit but take up most of the company’s time, effort, and resources. When my client (the new CEO) suggested some changes to slim down the product portfolio, the organization rebelled quickly. Sales people suggested that by cutting some of the products key customers would get really upset and would no longer buy the more expensive products. Operations leaders complained that if some of the products were cut their operational excellence and capacity optimization would be destroyed because they had figured out a way to spread the costs of producing low margin products over the aging and inefficient assets used in production.
This is a difficult challenge faced by many organizations that requires a discipline of Business Acumen. Based on research, focus groups, and my own experiences helping companies develop their Business Acumen skills, I present five actions to take that can help balance the product portfolio.
Develop a Plan
You can’t wake up one day and decide that today’s the day you feel like cutting 80% of the product portfolio. It takes preparation, time, and meticulous planning. Your plan should be at least 2-5 years long and contain marketing plans, sales plans, and operational plans to simplify the portfolio and protect the key metrics of performance like revenues and profits at the same time. The best way to develop this disruptive plan is through a collaborative process of all key stakeholders so everyone is aligned and willing to support the change.
Inform Current Customers
One of the first things you need to do when executing your plan is inform your customers of your intent. What I have discovered is that there is a good, transparent way of sharing with customers your plans and needs for survival and there is a bad, less transparent way that is insincere and tricks customers into either switching to a product they may not want or losing their supply altogether. I say choose the right way and train your sales people to master their techniques of delivering the message.
Focus on New Customers
The next part of the plan is to determine and focus on the new customers that will appreciate and pay for the value proposition you are offering in the slimmed-down product portfolio. Concentrate on the message and value to your customers, not what’s in it for you!
Inform Current Employees
Disruptive change such as significantly reducing the product portfolio will have a devastating impact on the morale and the direct livelihood of some employees. You have a responsibility to use complete transparency and Business Acumen logic for sharing the reasons why and how it will be important to the company and the employees. Unfortunately, some employees may not make the other side of the transition but again, complete transparency is the only course of action.
Focus on New Employees
With significant change can come a new for new employees with new skill sets. For example, if you are cutting old, commoditized products and focusing on the innovative, newer products, the skills that were needed for the old products may not be needed for the new ones. As part of the change your organization will have to acquire, train, and retain the top talent needed to execute the new strategy.
